… Federal budget pressures hit defense industry, a big piece of Maryland’s economy …
By Jamie Smith Hopkins, The Baltimore Sun
6:58 PM EDT, May 17, 2011
Northrop Grumman Corp.’s plan to cut 500 jobs in the Baltimore region — largely through buyouts but also with 70 layoffs — underscores the uncomfortable shift defense contractors are feeling as the era of big spending growth ends.
The Baltimore-area reductions account for most of the nationwide cuts Northrop Grumman is making to its electronic systems sector, which produces airborne radar, navigation systems and other military equipment. The defense-contracting giant notified affected employees at the sector’s Linthicum headquarters and several other locations Tuesday that their last day of work would be May 31.
Northrop Grumman blamed a reduction in business “that is directly related to the current slow-down in defense spending as well as increasing international economic pressures” — a problem facing not only the industry but the state.
In Maryland, with its profusion of military contractors around bases, near the airport and inside the Capital Beltway, “literally thousands of jobs are on the line as defense demand weakens,” defense analyst Loren B. Thompson said this week.
“Times are getting tough for defense contractors, and they are responding by reducing their work forces, shutting plants and cutting back on discretionary spending,” said Thompson, who works at the Lexington Institute, a think tank in Arlington, Va.
Companies and state economic development officials are hopeful that the local fallout will be minimal and will be outweighed by growth spurred by the continuing relocation of military operations — and their contracting largesse — to Fort Meade and Aberdeen Proving Ground. But military budget pressures have not been felt in Maryland since the end of the Cold War.
The defense contracting dollars flowing to the state tripled between 2001 and 2009, according to the most recent Census Bureau figures. Those days are gone. The overall national defense budget rose only slightly this fiscal year, and military leaders say they’re taking a hard look at contracts for cost savings.
“There is a belt-tightening that’s going to continue for the foreseeable future,” said Mike Hayes, a retired Marine brigadier general who heads the state’s Office of Military & Federal Affairs.
Some procurement opportunities are being cut now as the government struggles with worrisome deficits. More are expected. Defense Secretary Robert Gates said this year that he wants to remove $78 billion in expenses from the military budget over the next half-decade, including nearly $6 billion by slicing the “staff support” contracting pool by 10 percent a year over three years.
Funding delays also plagued contractors in recent months as the budget debate dragged on in Congress, said Deniece Peterson, senior manager of federal industry analysis for Deltek Information Solutions, which does public-sector market research. Until the budget for the 12 months ending in September was finally approved in April, the military held off finalizing a variety of contracts, she said.
Defense contractors aren’t in dire straits, but once-high profit margins are falling and some companies are posting small drops in revenue, said Peter Skibitski, senior defense analyst at SunTrust Robinson Humphrey in Atlanta.
“If you want to maintain your profitability … then you start looking for savings, looking to take out costs,” he said.
And that’s what defense contractors are doing.
Bethesda-based Lockheed Martin Corp.’s employment in Maryland has fallen 8 percent over the past year and is due to shrink further. This month it said it is laying off 227 employees in its missions systems and sensors division nationwide, including 38 in Middle River.
It was the second layoff in 13 months at the Baltimore County location. And about 50 more local jobs are slated to disappear when the company ceases manufacturing operations there at the end of this year.
In a statement about its newest layoffs, Lockheed Martin said it needed “to focus on tightly controlling costs to remain as affordable as possible in an extremely competitive marketplace.”
Higher-level employees saw the writing on the wall last summer: When the company offered buyouts to executives, one in four took the deal — more than 600 in all.
Engineering defense contractor ITT Corp. warned state regulators in March that it was closing a 70-employee office it had opened to fanfare just last summer in Anne Arundel County.
ITT said it decided to split itself into three separate companies and would no longer need the shared information-technology support the office provided. The breakup was announced shortly after the New York-based company said its defense unit would likely see a 2 percent decline in revenue this year while its two other units were poised for growth.
And, of course, there’s Northrop Grumman. The California–based company, one of the largest employers in Maryland, said Tuesday that it would lay off 140 people throughout its electronic systems sector — mainly engineers and manufacturing workers — and pay severance to 600 more workers leaving voluntarily. Most of that reduction is hitting the Baltimore region, reducing employment in the division from 8,500 people to 8,000.
A Northrop Grumman spokesman, Jack Martin Jr., said the company lost no contracts and was simply reacting to overall slowdowns in spending.
Still, Maryland has benefited from the base realignment and closure process, or BRAC.
That nationwide effort has boosted contractor employment by more than 5,000 jobs in the Baltimore region, mostly in the last year, according to the state Department of Business and Economic Development. Hayes, who works in that department, said he’s not seeing a lot of defense companies laying off employees so far. Non-BRAC growth at the National Security Agency, including its new cyber command that focuses on online threats, is also helping support employment.
That helps explain why some defense contractors say they’re feeling upbeat about their prospects. BAE Systems, which is laying off workers in Texas, says it’s hiring cybersecurity employees in Maryland. ARINC, a defense-focused engineering firm in Annapolis that employs more than 1,000 in the state, says it’s also adding jobs. And AAI Corp., a Hunt Valley company that makes unmanned aircraft, has hired 63 people in the area this year and has openings for 70 more.
Cuts to the “immense” Department of Defense budget will inevitably hit some companies harder than others, said Linda Hartwig, a spokeswoman for ARINC. One reason Defense Secretary Gates has been on the hunt for cost savings is so he can put that money toward other areas — a development that analysts say could work to some companies’ advantage.
“We’re not anticipating any downturn,” Hartwig said.
Ray Bjorklund, chief knowledge officer at Deltek FedSources, which does public-sector market research, thinks BRAC will be a contracting boost for a few years. But after that, budgetary pressures will likely be felt by those agencies, too, he said.
There’s also no guarantee that Gates’ plan to increase funding for new priorities by cutting back elsewhere will work out the way the Department of Defense hopes, Bjorklund said.
“I’m a little bit nervous that Congress is going to say, ‘Thank you very much,’ and just sweep that money right out,” he said, pointing to the increasing calls by Republicans to rein in spending to reduce the federal budget deficit.
Steven Reid, general manager of AAI’s unmanned aircraft systems group, said his company is expanding because it continues to land new contracts and is optimistic about funding opportunities for its niche.
But the country’s economic challenges are making all contractors nervous, he said. They well remember the cutbacks that came in the 1990s with the pullback in Cold War spending and, if anything, they’re more anxious now than they were then, he said.
“I think there’s much more pressure, serious pressure, today than there has been in the past,” Reid said.
Copyright © 2011, The Baltimore Sun